The Causal Link between Spending and Revenue: The Lao PDR

  •  Phouthanouphet Saysombath    
  •  Phouphet Kyophilavong    


With this paper, we investigate the link between spending and revenue for the Lao PDR during the period of 1980 to 2010. We apply an approach that uses cointegration and an autoregressive distributed lag (ARDL) combined with a Granger causality within a vector error correction framework (VECM). The results disclose that a long-run causality exists between government spending and revenue. This causality is unidirectional from spending to revenue, which supports the spend-and-tax hypothesis. Our results can help policy makers determine whether government spending is primarily the outcome of an increase in tax revenue necessary to finance the spending.

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